Cusano's Growth Plan

How former pension fund manager Michael Chiusano sequed into the cigar world and now plans to expand his 13-year-old Cusano cigar brand.

Michael Chiusano, a compact man with an athletic build and closely cropped salt-and-pepper
hair, opens the door to his hotel room at the Gran Almirante, the finest hotel in Santiago,
Dominican Republic. As he steps into the hallway, the unmistakable aroma of a freshly lit cigar
follows him. It's 7 a.m.

Chiusano's unbound enthusiasm for cigars is infectious—spend five minutes with the guy and
you'll be craving a smoke. He has plenty from which to choose—DomRey Cigar Inc., the Bradenton,
Florida, company he owns along with his 49-year-old brother Joe, a partner and a member of the
management
group, has a cigar for every budget, from machine-made cigarillos to bargain-priced bundles to
boxed, handmade Salamones retailing for $12. The lion's share of the cigars bear the name Cusano,
the phonetic spelling of their surname.

The business is larger than many think. Michael Chiusano says he sold 4.6 million cigars in
2007, and is expecting to do five million in 2008, which would make him a solid midsize player in
the premium cigar industry. Measured in unit production he's bigger than La Flor Dominicana and
about the same size as Padrón Cigars. Unlike those companies' products, however, all of his cigars
are made for him by other cigarmakers, most of them by Hendrik (Henke) Kelner in the Dominican
Republic, but Chiusano plans to be making some of his own cigars by June in a new facility he's
acquired in the Santiago Free Trade Zone. "We've learned a lot from Henke in 14 years," says
Chiusano. "I think he's the best in the world. My respect for him and his ways are truly beyond
words."

Chiusano looks upon his relationship with Kelner as one of teacher and student. "He's been a
very important and influential mentor in my life," he says. While having an easygoing lunch in
Kelner's conference room at the Cigars Davidoff compound, Chiusano brings repeated smiles to
Kelner's face by joking that the two of them will retire to a mountainside, take it easy and roast
coffee while smoking cigars. But the time has come for Chiusano to do more on his own. "Slowly,"
he says, "we've been trying to go from a private-label contractor to 100 percent owners of the
process. In the bigger picture, what our company is doing is backward integrating. Which just
gives us more control over our products. Backward integration is making our own stuff—it would be
impossible to do that in one day."

Michael Chiusano's first job was as a chemist, which didn't suit his personality. "Four
months—until I went screaming into the street for a taxi," he says. His next stop was Wall Street,
where he found a job to suit his number-crunching style, analyzing stocks for Dean Witter.

After six months, Chiusano was hired by Prudential in Boston. Later he went to Shearson Lehman.
Eventually he became a registered investment adviser, working with hundreds of millions of dollars
in pension funds. "I never thought to get into the tobacco business—it just happened," he says. An
Italian-American born and raised in Brooklyn who later moved to Boston, he doesn't fit the typical
cigar guy mold. "There was no Cuban ancestry, he
doesn't have the Panama hat, he's a real numbers-cracking guy," says David Garafalo, owner of Two
Guys Smoke Shop in Salem, New Hampshire.

When Garafalo's store was in Boston, Chiusano would smoke there, and after a trip to the
Dominican Republic in 1995, Chiusano brought home a handful of unbanded Dominican cigars he had
enjoyed on his trip. He made up his own cigar band using letterhead from his financial company and
handed one to Garafalo. "I thought they were great," says Garafalo. "He said, 'I can get these.' I
said, 'I'll take them—I want them all.'"

While all agreed the cigar was fine, there was some debate about the name. Those who didn't
know Chiusano, or who didn't know that in Italian the "ch" becomes a hard "c," pronounced the word
"chee-ooo-zhan-oh." The "h," as well as the "i," was lost, and the Cusano Hermanos cigar brand was
born.

Like dozens of other entrepreneurs in the mid-1990s, Chiusano had entered the cigar business.
Thirteen years later, unlike nearly all of them, he's still around.

Cusano Hermanos begat many other Cusano cigars, including Cusano Corojos, Cusano 18s and Cusano
Xclusivos. Some have received 90s in Cigar Aficionado. All have become known for their
value—Cusano cigars provide a lot of bang for the buck. The Cusano 18 Double Connecticut Robusto,
rated 89 points, is only $4.25, a steal for a handmade, fat, quality smoke. It's one of Cigar
Aficionado's Best Buys of 2007.

"If you look at our very loyal fan base, it's the everyday smoker, not the weekend warrior,"
says Chiusano. "They say price is what you pay, value is what you get. You don't have to pay a lot
to get great stuff."

Joe Chiusano, left, is a partner with his brother Michael in DomRey Cigar.

Chiusano slips back into his analyst mode often, and enjoys breaking down the cigar market into
categories while making comparisons to other consumer products, such as cars. With pen and paper,
he sketches the categories: such price-aggressive brands as Kia and Hyundai are near the bottom of
the price spectrum; Toyota is in the price/value segment; Cadillac in the premium segment; and
Lexus and Mercedes in the prestige segment. Cusano's handmade bundle cigars, which retail for
$2.50 to $3.50 each, inhabit the price-aggressive segment, while his boxed handmades, at around $5
a pop, are the Toyotas of the cigar world. (Chiusano drives a Land Cruiser.) In cigar shops full
of the tobacco versions of Lexus, Acura and the occasional Ferrari, his Toyota Cusano was
sometimes a tough sell.

"A lot of stores didn't want to sell Cusano 18 because it's too good for the money," he says
plainly. "Our [retailers] came to us and said, 'Make something more expensive—people who wear
Rolex don't want to look at a Timex—they'll never find out how good you are.'"

Chiusano decided to broaden his product line and go after the prestige segment. In 2006, he
launched the Cuvée line, priced at a greater premium compared with his regular boxed Cusano line.
Reviews in Cigar Aficionado and Cigar Insider were mixed, ranging from 85 to 90 points. Chiusano
is making changes, including reblending his Cuvée Rouge line and dropping a contract manufacturer
who made one of the blends.

"The rollout of our Cuvée brands has been hindered because some things did not come out as
intended. I realize that if Henke doesn't make the product, then it must be made by me. No one
else will do," says Chiusano. "We are fortunate that we can wait until we are 100 percent
satisfied with the finished product before full-scale release since we have only ourselves to
answer to. Believe me, I'm not an easy one to please." The new Rouge and the Cuvée 151 line, which
has never been sold, should hit store shelves when this issue goes to press.

Adding more upscale brands meant changing the sorting process of the tobacco his company
buys—now the top 10 percent is reserved for the prestige Cuvée brands.

There are lower rungs on the ladder as well, and lesser leaves get kicked down for bundles or
machine-made cigars. Having more price segments allows for greater economies of scale, and every
leaf has a home. In October, DomRey picked up U.S. distribution of Panter and other dry-cured
cigarillos from Royal Agio in the Netherlands. (The brands previously were distributed in the
United States by Ashton.) The little cigars are made in Holland, Belgium and the Dominican
Republic. Chiusano is looking at other machine-made cigars, and is testing the waters in the
smokeless tobacco market. "Most guys throw out wrapper scrap—what do you think chewing tobacco has
in it? Forty percent of our stores sell [dip]." By being smart with the bottom line, he's able to
put out a handmade at a smart price.

Just as Chiusano preached diversity in his investment business, he sees that as the only route
to success in the cigar business. "It's a fickle sector. For us to be able to sustainably
participate, we need to be diversified. To grow brings up some problems—you either have to
cannibalize one of your existing brands, or diversify."

For a small company, Cusano has impressive diversity. It's also innovative. Every cigar is
bar-coded, a key to the company's success in convenience stores, which account for 3 to 4 percent
of sales. (At a tobacco trade show dominated by convenience store buyers, Cusano is a huge
player.) Chiusano also demands that a live person answer the phone, and answer it quickly. "I
don't like it to ring more than twice," he says. DomRey's computer system links incoming calls to
the outgoing package. Chiusano is energetic and virtually tireless, prone to rising early and
firing off e-mails, and he says he often forgets which day of the week it is. (His brother says
Michael often gets up at six on Saturdays, sends off e-mail and wonders why he's not getting
replies—forgetting it's a weekend.)

In the warm January sunshine in the Dominican Republic, Chisuano is gung ho. His alarm clock
corona is like another man's doppio shot of espresso. He walks through a recently replanted field
of tiny tobacco plants in Jacagua owned by Jose Arnaldo Blanco, who will be providing Chiusano
with tobacco for new projects.

He's thinking about the possibilities—the Dominican wrapper will come from here, maybe binder
from there—while pointing out the different types of palm trees around the land. (He's an admitted
tree nut.) It's a gorgeous place, part of the Cibao Valley in the shadow of short mountains, near
Santiago Viejo, Old Santiago.

"This is a new area for us, really it's the next step back in controlling the process. Instead
of buying the wrapper, we're growing the wrapper, which gives us control," he says.

A haggard white horse slowly pulls a small plow between the short rows of plants. It's 9 a.m.
and Chiusano is partway through his second cigar of the day, a Cameroon-wrapped smoke. The cigar
he's smoking is going to be dubbed Cusano Cameroon. "Remember Killer Cameroon?" Chiusano asks,
referring to a brand he took off the market more than three years ago. "'Killer' attracted guys
who wanted their heads blown off. The balanced guys who would have liked it were afraid of it. We
still don't make anything to knock your head off. What we do is we make very good cigars for a
certain taste. We're cooks—we love tweaking the dishes."

Another change is the formation of D.R. Global S.A. Cusano cigars are not only sold in 2,100
American stores, but also in several other countries, including Germany, Taiwan, Finland, Denmark,
Holland, Mexico, even Romania. It's inefficient to send cigars from the Dominican Republic to the
United States and then to international shores—D.R. Global, based in Santiago, will become
Chiusano's global headquarters and manufacturing center, facilitating foreign shipments.

In early winter, D.R. Global was a concrete building with bare walls and empty rooms. It's
built from concrete block, and it's big, 35,000 square feet, with imposing walls. A planned
mezzanine would boost the space to 60,000 square feet. Chiusano walks through the space, the only
light coming in from the open door and sparse windows, giving it a gloomy look that reminds a
visitor of the mines of Moria from The Lord of the Rings. Chiusano is excited, like a guy showing
a buddy the framework of a new house. Here's where the rolling gallery will be, he says, pointing
to one room, there a cooler, there an office.

It's a good time to invest in a free zone in Santiago—many textile companies have left for
cheaper labor areas, and buildings can be had inexpensively. Chiusano claims a "sweetheart deal"
on the rent.

"It's huge," he says, his voice echoing off the bare walls, "but I've blown through four
buildings already." His confident smile tells it all—he has big plans for the place.

For Chiusano and his brother, life is good. They left the snowy Northeast behind for the
sunshine of western Florida ("one of the best feelings in my life," says Joe, "was giving away my
snowblower"), they live on adjoining properties, and Joe's kids ride a golf cart to get to Uncle
Mike's house. And they're doing what they want to do.

"We're normal guys," says Michael Chiusano. "We smoke cigars, we sell cigars. And five million
people a year smoke the cigars we smoke."